Critics say affluent buyers could cash in or it may be used to buy second
homes. Rosie Murray-West explains the Chancellor's mortgage schemes
and the impact they might have.

Targeted help for households, or the beginning of an unsustainable housing bubble? No policy in Chancellor George Osborne’s Budget has divided the nation so strongly as the 'Help to Buy’ scheme which will result in the Government underwriting hundreds of thousands of home loans.

How is the Government selling it?

Mr Osborne said that the plan was “a new offer to the aspiration nation” describing the current situation where families struggle to put together a housing deposit as “a blow to the most human of aspirations”.

What do the critics say?

However, critics said that the scheme, which is a mix of interest-free loans for newbuild properties and Government-guaranteed mortgages, could inflate house prices that might then collapse with devastating consequences. It is possible that the schemes could be exploited by those wanting to buy second homes for their children.

Critics also point out that it could hinder exactly those people it was supposed to help - teachers and other lower-paid young professionals who still won’t be able to borrow enough and will be hit by further house price rises.

“This is unlikely to help younger borrowers on lower, or even middle incomes such as teachers,” said Mick McAteer, from the Financial Inclusion Centre.

“It is likely to prove very popular. If so, I think it will inflate the property bubble in London even further providing a short-medium term boost but very, very damaging in the long term if the market then collapses with greater force.”

How will it work?

Help to Buy will come in two forms, although further details are yet to be ironed out.

The first version, available immediately, will give anyone who wishes to buy a newbuild property worth up to £600,000 an interest free loan worth up to 20pc of the purchase price. An incredible amount - £130bn - has been made available for this.

The purchaser must provide a five per cent deposit. After five years, interest will be payable at 1.75pc and will rise in line with inflation, based on the retail prices index (RPI), but the loans can be paid back at any time.

The second part of the scheme will be available in January next year. This will give those who wish to buy any property, whether newbuild or period, a Government-backed guarantee on 20pc of the mortgage. This effectively means that mortgage companies shoulder less of the risk of possible default, so should provide better mortgage deals. The Government will offer £12 billion of guarantees, intended to help an estimated 644,000 people.

Details of the schemes, particularly the second one, are yet to be ironed out. It is not yet clear what sort of rates will be available on mortgages on the secone element because the Government has not yet said what it will charge lenders to use the guarantee.

Who can take part?

The scheme is not restricted to first-time buyers, meaning that those who are stuck in a house that is too small for their family or in the wrong area because it is too difficult to get a new mortgage deal should be able to benefit. Also, there is no cap on the salary you can earn and still benefit from the scheme.

Could you buy a second home?

The Budget documents state that Help to Buy will only be available to buy a home to live in, so it will not be available on buy to let mortgages. However, it is not clear whether it will stop people from renting out their current home and buying a new one using the scheme, or buying a home for their children.

Speaking on Radio 4's Today programme today, George Osborne appeared unable to give a definitive explanation, saying the scheme was not to help people buy second homes, but was unable to say how they would be banned from doing so.

"The mortgage market is an extremely complex thing," he said. "The intention of the scheme is absolutely clear, which is that it is for people who want to get their first home or have a home and want to move to a bigger home, because perhaps they have got a bigger family. We are working with the industry to get a scheme that works."

Presumably, the Treasury will now work on the exclusions in the smallprint.

Could affuent buyers benefit?

Even estate agents are concerned that those striving to buy a home or struggling to move may not be the main beneficiaries. Ed Mead, director at Douglas & Gordon, which operates in prime London markets such as Kensington & Chelsea, said that he was already getting calls from clients to discuss how to use the scheme.

“I’ve had a few calls to discuss this which is surprising given that the sort of people we deal with aren’t usually associated with help getting a mortgage,” he said.

“Given the limit at £600,000 and lack of salary cap surely this is going to appeal to those wanting really quite nice property, for example three bedroom flats and houses in Battersea and Wandsworth. If I was being cynical I’d call those Tory voters.”

He pointed out that lenders are unlikely to check whether people really are struggling to scrape together the cash themselves before giving them the interest-free loans, meaning that wealthy people could essentially get a large amount of cash to help buy quite expensive homes.

“With a £600,00 limit this seems a long way from the average at £167,000 and so is perhaps not necessarily going to help those most in need. As an agent, particularly as this could help London buyers.”

How will it impact on house prices?

Each scheme will run for three years, raising fears that it could create a temporary bubble, as buyers rush to take advantage.

And Help to Buy, of course, is just the latest initiative to support the property market following the electronic printing of £375bn via quantitative easing, four years of rock bottom interest rates and the £80bn Funding for Lending Scheme, launched last year handing out loans with rates as low as 0.25pc to banks and building societies on the hope they lend money on.

Ed Stansfield, chief property economist at Capital Economics, a forecaster, said: "Yesterday’s budget was significant as it underlined the determination of policymakers to prop up house prices."

But he added "We doubt that any resulting increase in demand will be large enough to drive house prices sharply higher, but at the margin it provides additional support for the status quo.

"Housing is materially overvalued. a sustained house price recovery will only occur once the gap between average house prices and average incomes has returned to levels that are much closer to past norms. While this required adjustment could come via another sharp drop in nominal house prices, there is little sign of an obvious trigger for this on the horizon.

"Therefore, the adjustment is may well be protracted. Specifically, house prices are likely to stagnate, while earnings gradually catch up. Our new forecasts for national house prices to be flat this year and next, embodies just such a scenario."

How well have previous schemes worked?

Recent schemes aimed at kickstarting the housing market by helping first-time buyers have not reached their targets. Housing charity Shelter said that the scheme was just an extension of exisitng schemes which “have so far failed to deliver on any scale.”

A Shelter spokesman said: “House building is currently at its lowest levels for almost a century. This budget was a huge missed opportunity to build enough homes to make sure our children will have a stable and affordable place of their own. Helping a small number of first-time buyers today will do little to meet the aspirations of young families tomorrow.”

Think tank the Social Market Foundation said that the scheme will “really only help older home-owners with the tax money of the young”.

“Overall, the scheme will entice young people to load themselves up with debt to finance overpriced houses, keeping the housing bubble inflated with taxpayer guarantees. And if it all goes wrong and house prices fall, the young will pay twice: once for their overpriced house, and once through their taxes to pay for the losses on this unwise gamble and £12 billion contingent liability.

“Older, wealthy home-owners are the only winners from today’s announcement and the causes of our housing problem go unaddressed once again.”